Production Possibility Curve (PPC)

• What is a Production Possibility Curve?

– A graph showing the attainable choices available to an individual or a
society for producing two goods or services based on the following two
assumptions:
– There is a fixed quantity of resources available and that this quantity is
used to capacity (i.e., resources is fixed and fully employed/utilized
– The state of technology is fixed.

Other associated names for PPC

- Production Possibility Frontier (PPF)
– the boundary between combination of goods that can and cannot be
produced.

- Transformation Curve
– a curve which shows how one good can be ‘transformed’ into another
good by reducing the output of one and transferring the resources into the
production of the other.

Drawing the PPC

Suppose in the island of Ricemaker they can produce two goods, Sugar and
Rice with the resources they have.

The following table shows the possible combinations of the two products

Possible combinations A B C D E F
Sugar 15 14 12 9 5 0
(000 bags)
Rice 0 5 9 12 14 15
(000 bags)
Task 1:
Draw a production possibility curve using the data given. Label all points on the curve.

Task 2:

Calculate the opportunity cost of producing 2000 bags of rice if the island of
Ricemaker decided to move from Point D to Point E.
Calculation of Opportunity Costs

At Point D: At Point E:
Rice 12 000 bags 14 000 bags
Sugar 9 000 bags 5 000 bags

– Opportunity Costs of producing 2000 more bags of rice is:

• OC = 9000 bags – 5000 bags = 4000 bags of sugar.
• i.e., 4000 bags of sugar will lose if Ricemaker decided to produce 2000 more bags of
rice

– OC per unit of producing 2000 more bags of rice is:

• 4000 sugar bags/2000 rice bags = 2 sugar bags per bag of rice
• That is for every new bag of rice produced as Ricemaker island moves from Point D to
Point E they will lose 2 bags of sugar
Points to note
• The production possibility frontier (PPF or PPC) is the curve resulting when the data
is graphed
• The PPF or PPC shows all efficient combinations of output for this island economy
when the factors of production are used to their full potential
• The economy could choose to operate at less than capacity somewhere inside the
curve, for example at Point G, but such a combination of goods would be less than what
the economy is capable of producing.
• If the economy is producing at this point then it underutilized its resources
• A combination outside the curve such as Point H is not possible since the output level
would exceed the capacity of the economy.

The Shape of the Production Possibility Curve

Two shapes of the PPC are:
- Bowed-Out
- Straight line

• Bowed-Out PPC
– The most common shape of the PPC.
– A bowed-out PPC occurs due to the Principle of Increasing Costs.

Principle of Increasing Costs.

- States that as more of one good is produced, increasingly larger amounts of the other
good must be given up
That is the opportunity cost increases as one moves toward either extreme on the curve
of production possibilities

• Straight Line PPC

– Observed only in cases where resources can be used with equal Cases in the
production of two commodities.
– That is the two products are very similar to one another
– Example:
• Coffee and Tea
– A straight line PPC occurs mainly due to the Principle of Constant Costs.

• Straight Line PPC

• Consider the following data of possible combinations of planting Coffee and Tea
– Principle of Constant Costs
• As the production of one product increases, the opportunity cost of producing
additional units is unchanged - i.e., the production possibility frontier will be a straight
line.

Coffee 0 3 6 9 12 15
(000 kgs)
Tea 15 12 9 6 3 0
(000 kgs)
The two products are almost identical and can be produced equally efficiently using the
same resources.

Opportunity costs of producing more of Coffee is 3000 kgs reduction in Tea and the same
when more of the Tea is produced.

Shifts of Production Possibility Curves

• The production possibility frontier can be shifted outwards or inwards if either or both
of the initial assumptions are relaxed

• For example:
– an increase in the quantity of resources and the application of improved technology
can cause an outward shift of the PPC
– a decrease in the quantity of resources and decrease in technology can cause an
inward shift of the PPC.
• Increase (or decrease) in the quantity of resources includes:

– An increase (or decrease) in the capital stock

– An increase (or decrease) in the amount of labour (employment)
– An increase (or decrease) in natural resources,
– eg reclaimed land, oil discovered or new minerals etc
– An increase (or decrease) in productivity
Technological improvements includes:
– Improved methods – ie, assembly-line, production with specialization or division of
labour.
– The introduction of high-tech machinery

Changing in the quantity of resources and changing in technology can produce different
shift effects on the PPC

• For example: Outward shifts of the PPC

• If increases both in resources and technology applies to both goods then:

– the whole production possibility curve moves outwards.

• If the increase in both factors apply to only one of the commodities graphed:
there will be an outward movement of only one end of the curve.

PPC & Economic Growth

• Economic Growth:
– the process of increasing the productive capacity of the economy which results in
increasing national income or output.
– outward movements of the production possibility curve denote economic growth
measured in terms of the quantity of goods and services produces annually.
– growth is greatest over a period of time if resources are allocated to research and if
subsequently the improved technology is applied to production.